Building a Bridge to a Tri-Polar World Economy: An American Growth Strategy
Policy Paper
May 21, 2013
Five years into the global financial crisis, the prospects for economic growth are again deteriorating. The IMF has revised downward its 2013 forecast for world economic growth to 3.3 percent, confirming that a worldwide economic growth compression is still at work. U.S. GDP growth in the first quarter of 2013 came in at 2.5 percent, well below estimates, and is expected to weaken further as cuts in government spending and payroll tax hikes together with headwinds from Europe and China continue to act as a drag on the U.S. economy. The Euro-zone remains in recession, as economic weakness has spread from the southern Euro-zone economies to Germany and other core economies. Meanwhile, Euro-zone unemployment has risen to a record 12.1 percent, with jobless rates in Spain and Greece at depression levels of more than 25 percent. China’s growth rate has compressed from its double-digit average of the past several decades to less than 8 percent. And Asia and emerging markets more broadly face slower growth in the coming years as they attempt to move from investment-led to domestic consumption-led growth.
More worrying, there are signs that the foundations of the world economy – at least as we have known it over the past 20 years – are eroding. Economic growth models lie broken across developed and emerging markets alike. Globalization is in retreat as financial institutions retrench and re-nationalize. Debt levels in most of the advanced economies are approaching politically, if not economically, unsustainable levels, forcing policy makers to rely almost exclusively on Central Bank monetary measures that carry excess liquidity risks and have diminishing returns. As growth compresses and unemployment rises, the political temptation to enact policies that protect rather than expand has increased. Early signs of a creeping beggar-thy-neighbor tendency are evident in world currency markets, as one economy after another has sought to weaken its currency to gain competitive advantage and increase net exports. If allowed to continue, the resort to beggar-thy-neighbor measures could bring an end to the world’s second great try at globalization.
Of all the major developed economies, the U.S. economy is in the best position to break out of this five-year growth compression and to fix its broken economic growth model. Over the past few years, it has developed several new potential drivers of economic growth powered by Middle America – a shale oil and gas revolution that could make the United States a surplus energy producer, a manufacturing renaissance made possible by lower energy and labor costs and the adoption of advanced manufacturing techniques, and new technological advancements in cloud computing and biotechnology. Together, these developments could make the U.S. economy less dependent on debt-financed consumption and increase its growth potential.
But this transition to a more investment- and production-led economic model with strong economic growth is being held back by the unfavorable world economic conditions in Europe and Asia and by a premature move toward fiscal consolidation at home. The latter has been prompted in part by a worry that global capital markets will at some point turn against U.S treasuries.
For U.S. policymakers concerned with international economic policy, these developments pose a dual challenge: how to mix international concerns with domestic policy to put the U.S. economy on a new robust economic growth path of 3 to 4 percent a year; and how to stabilize globalization and point it in a more sustainable direction. Five to eight years out, there is the promise that a rising global middle class in emerging economies will help drive demand for U.S. goods and services and will usher in an era of more balanced world economic growth. The challenge is how to get from here to there, given the concurrent crises in the United States, Europe, and Asia.
In the late 1990s, following the Asian financial crisis, the United States was able to stabilize the world economic system by absorbing the surpluses of troubled Asian (and Brazilian) exporters. But today the world economy is much larger, the crisis much more widespread, and the U.S. economy much less able to act as the world’s consumer of last resort. Given the global nature of the growth compression, the ideal solution would be a coordinated world economic recovery with each major region committing itself to fiscal as well as monetary expansion and with the international lending agencies channeling resources into the most depressed debtor economies.
But Germany and other major economies have ruled out such an ambitious approach, opting instead for a program of fiscal retrenchment and structural reform in spite of growing evidence that this approach is not working and that an alternative is needed. The United States has more recently followed course with its own form of fiscal austerity created by a series of small fiscal deals that have raised taxes and cut government spending.
Faced with fiscal contraction at home, the Obama administration seems to be moving to a strategy of trying to offset the fiscal drag with external demand by talking up future free trade agreements with Europe and Asia. But such a strategy runs up against the realities of weak global demand and Asia and Europe’s own goal of exporting their way out of the current economic slowdown.
This paper explores the options for supporting a transition to investment- and production-led growth at home while averting beggar-thy-neighbor policies globally – creating a bridge to a more balanced global economy. It explains why the current mix of international policy is not working and why it is complicating the transition to a more balanced U.S. economic growth model. It then shows why the administration’s proposed strategy of pursuing new free trade initiatives with Europe in the Atlantic and with Japan and the Southeast Asian economies in the Pacific will fall short of the dual goal of facilitating the transition to a new U.S. growth path and preventing the further collapse of globalization. Finally, it lays out a road map for an alternative growth strategy that would combine a bold public and human capital investment program at home with an international strategy that would deepen integration with our trading partners in the Americas and in so doing provide a model for other major economies to proceed with their own regional economic deepening. This would set the stage for globalization’s next iteration: a more balanced tri-polar world economy.